Q2 2019 Earnings Call
Good day, everyone and welcome to the Chuys Holdings incorporated second quarter 2019 earnings Conference call.
Today's call is being recorded at this time all participants have been placed in a listen only mode and the lines will be open for your questions. Following the presentation on todays call, we have Steve Hislop, President and Chief Executive Officer, and Jon Howie, Vice President and Chief Financial Officer of Chuys Holdings incorporated at this time I will turn the conference over to Mr. Howie. Please go ahead Sir.
Thank you operator, and good afternoon by now everyone should have access to our second quarter 2019 earnings release. It can also be found on our website at www Chuys dot com in the investors section.
Before we begin our review of formal remarks, I need to remind everyone that part of our discussions today will include forward looking statements. These forward looking statements are not guarantees of future performance and therefore, you should not put undue reliance on them.
These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect we refer all of you to our recent SEC filings for a more detailed discussion.
The risks that could impact our future operating results and financial condition with that out of the way I'd like to turn the call over to Steve.
Thank you John Good afternoon, everybody and thank you for joining us on the call today, let's begin with a high level overview of our results and then go over the progress we've made in our various initiatives. We are pleased to see our topline momentum continued during the second quarter as we grew revenues by over 6%, including a 1.9% improvement in comparable restaurant sales.
In terms of profitability, while we were able to improve our restaurant level operating profit by approximately 5% our restaurant level margins were negatively impacted by continued hourly labor rate inflation and higher produce and be beef cost during the quarter to that end. We believe the various initiatives. We put in place are important in our efforts to drive sustainable topline growth.
And we'll strengthen our foundation to further improve our profitability over the long term with that let me update you on our initiatives, which include targeted marketing campaign investment and technology off premise sales strategy and labor efficiencies.
In April we launched targeted marketing campaigns in Chicago, and Houston in an effort to improve brand awareness and better educate the market on to his experience in Chicago as well as drive increased frequency to our restaurants in Houston.
Our efforts include commercial radio strategic road and stadium signage and advertising on digital platforms like Youtube, who Spotify.
To date, we have been pleased with the improvements weve seen in these two markets and during the third quarter. We will continue our marketing push in Houston, and Chicago also adding Orlando to the mix looking ahead in the fourth quarter, we plan to launch a similar campaign in Dallas.
Apart from these targeted marketing efforts, we will continue to employ paid search.
Page social media campaign, and <unk> location based platforms for all of our markets.
Turning to no to lot technology, we are pleased with the trajectory of our on line ordering adoption right through our partner all as of the end of the second quarter to go sales through our website represent approximately 18% of all to go ordering as our promotion helped drive increased adoption rate.
Another exciting aspect about partnership with all their dispatch offering this batch will allow us to not only spoken eyes, our online ordering and delivering process for improved efficiency and order accuracy, but also provide our customers are various delivery options directly from our website. Our goal is to fully integrate the dispatch service to all of our stores by the end of the year.
Additionally in technology front, we are working on a table management system to further improve our front of the house efficiency, where they plan to fully launched a platform by the end of September .
We believe our current technology initiatives, well loss to gather important customer intelligence and ultimately serve as the foundation for our future loyalty program.
We rolled out our catering platform in two additional markets during the second quarter and believe that catering can serve as an important part of our off premise sales strategy catering not only gives us another avenue for topline growth, but also helps improve awareness of the chili's brand for the second quarter catering catering contributor approximately 1.5 million in revenue compared to approximately 400000 in the same period last year, we plan to offer catering and four new markets before the end of 2019.
On labor, we were able to leverage the improvement were made and our new store labor efficiencies as well as our menu pricing to offset the hourly labor rate inflation during the quarter as labor pressures continue our glide path initiatives come more important than ever as it allows us to reduce opening labor new hires by approximately 20% and achieve system average labor targets by month seven.
Switching to development, we successfully opened three new restaurants during the second quarter, one each in Hamburg, Kentucky.
Huntsville, Alabama, and Houston, Texas subsequent to the end of the second quarter. We opened one additional restaurant in Carmel, Indiana, bringing our total openings to date to five new restaurants. These new openings, one well and truly demonstrate our operators and development teams ability to instill the chuys culture in a short time looking ahead, we have one more opening to complete our 2019 developments plan, which is expected to open in the middle of the fourth quarter.
As we have said previously and important.
Important key to our future development will be our real estate analytics tool the tool will allow us to create a psycho graphic profile of our top markets and use it to identify new markets for successful expansion going forward to that end. We are currently hard at work in developing and testing this tool and our plan to utilize it for our 2020 development.
With that I'd like to turn the call over to our CFO , Jon Howie for a more detailed review of our second quarter results. Thank Steve revenues for the second quarter ended June Thirtyth 2019 increased to 113.1 million compared to $106.3 million in the same quarter last year. The increase was primarily driven by 7.9 million in incremental revenue from an additional 87, new store operating weeks as well as comparable restaurant sales growth.
These increases were partially offset by a decrease in sales from non comparable restaurants that are not included in the incremental revenue just mentioned in total we had approximately 1300 and seven operating weeks.
During the second quarter of 2019 comparable restaurant sales increased 1.9% during the second quarter and included a 3.9% increase in average check partially offset by a 2% decrease in average weekly customers.
Unfavorable weather conditions negatively impacted our comparable sales in the second quarter by approximately 80 basis points. In addition to the 20 basis point headwind as a result of the timing of Easter.
Effective pricing during the quarter was approximately 3.5%.
During the discussion of selected expense line items cost of sales as a percentage of revenue increased 40 basis points to 25.8% largely driven by approximately 5% and commodity inflation.
Inflation was largely attributable to unfavorable beef and produce pricing, partially offset by favorable pricing and dairy.
With year over year increase in beef and produce expected Dillinger, we now expect commodity inflation of approximately 3% to 4% for the year.
Labor cost as a percentage of revenue decreased approximately 90 basis points to 34.3% primarily due to many price leverage increased labor efficiency at new store openings and lower training expense for new managers. This was partially offset by hourly labor rate inflation on our comparable stores of approximately 3% and higher hourly rates in certain other markets.
Operating cost as a percentage of revenue increased 20 basis points to 14.1% due to higher insurance cost.
Restaurant repair and maintenance credit card and delivery service charges, partially offset by favorable pricing on restaurant supplies any increase leverage operating because of higher sales.
Marketing expense as a percentage of revenue increased 40 basis points to 1.4% driven by our new national level marketing initiatives.
Occupancy cost as a percentage of revenue increased 20 basis points to 7.2%, primarily due to higher rental expense as certain newly opened restaurants in larger markets as well as higher real estate.
Texas overall.
General and administrative expenses increased to $5.9 million from this.
In the second quarter compared to $5.2 million in the same period last year, driven by performance based bonuses and to a lesser degree by increases in management salaries and equity compensation.
As a percent of revenues DNA increased 30 basis points to 5.2% in summary, net income for the second quarter of 2019 was 6.2 million or 30 cents per diluted share compared to 6.5 million or 38 cents per diluted share in the same period last year. During the second quarter of 2019, we did incur costs of <unk> point $2 million net of tax or one cents per diluted share related to closing two restaurants. During the first quarter of 2019 as well as point $6 million net of tax or four cents per diluted share related to a legal settlement as a result, adjusted net income for the second quarter of 2019 was 7.1 million or 42 cents per diluted share.
Compared to $6.5 million or 38 cents per diluted share in the same period last year, we ended the quarter with $11.8 million of cash on the balance sheet and we currently have no debt.
With that we will now review our outlook for 2019, we have raised our expectation for the full year earnings per share.
Two between to between 93 cents and 97 cents from 91 cents and 95 cents per diluted share for 2019. This compares to 2018 adjusted earnings per diluted share of 88 cents.
Our guidance is based on the following updated assumptions, we continue to expect comparable restaurant sales growth for the year of 1.5% to 2.5%. We expect restaurant preopening expenses of approximately $3 million versus the previous range of 2.1 to 2.9 million. We expect gionee expenses of between 23.6 million at 24.1 million. Our effective tax rate is expected to range between zero to 5% and we are modeling annual weighted average diluted shares outstanding of $16.9 million to 17 million shares versus the previous range of 17 million to 17.1 million shares.
We expect to open six new restaurants, this year five of which have already been completed versus the previous range of five to seven.
And lastly, our capital expenditures net of tenant improvement allowances.
Are now estimated to range between 26 million and $29 million versus a previous range at 24.5 to 30.7 million with that I will turn the call back to Steve to wrap up.
Thanks, John while we are pleased with the trajectory of our sales trends, we still have more to accomplish to improve our store level profitability to that end, we are confident and the initiatives. We've put in place along with our disciplined development strategy will benefit us in the years to come in closing I'd like to thank all of our Chuys employees. None of these accomplishments would be possible without their hard work and dedication in delivering a chuys experience to our guests every day with that we're happy to answer any questions. Thank you.
Thank you just would like to ask a question. Please signal by pressing star one on your telephone keypad.
If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question well go first to marry hosts with Baird.
Good afternoon, thanks for taking the question.
Could you provide a little bit more color on the factors that drove the improvement in the labor line and how sustainable you think that is as you look to the second half of 19.
Hi, Mary Thanks for the question this is John .
We continue to believe that our management training labor will be down obviously with the number of stores that we're opening up.
We continue to see likely you're talking about the increased efficiency in the new stores.
Although we're only opening one more store in the last half of the year. We opened one right at the first of Q3. So we only have one more left and then with that against about four to five others that we opened up last year, we should have some labor efficiency in the back half the year compared to the previous year. So yes, with a long winded answer, but we expect to see maybe not as much as we saw this quarter.
But we still anticipate having some leverage on that line item in the back half.
Okay. Thanks for taking the question.
Thank you.
Well now take a question from will Slabaugh with Stephens, Inc.
Yes, thanks, guys and congrats on the quarter.
You are saying it implies a pretty nice ramp after the wet weather hurt you in April just started the quarter off.
So I was hoping you could help us understand what you saw in the period from a trend perspective as well as what you might have seen in the quarter to date period.
Yeah.
Yes.
Well. This is John we saw after like we're saying we're about flat to a little negative and in the in the fourth period and that was about 235 basis points impact.
Related to weather and the timing of Easter. We also saw about 30 basis points in total in five and six related to weather as well.
But we did see those pop back similar to the trends we saw in the first quarter. So they averaged in five and six right around to eight.
With the highest onebeacon in period, five and slightly down.
So three one and period five and a two four in period six and we saw that trend continuing in period seven.
Great Thanks for that color.
And then.
A follow up on on the revenue be really looks like.
Nice improvement you saw from stores that were opened 12 months or less that you put in the press release, I think thats the highest rate of growth year over year, we've seen in a while.
Can you talk a little bit more about what's driving some of the stronger volumes on a relative basis in some of your newer stores. How much is how much of that has to do with the outperformance of the new stores versus maybe some of the softer performance from last year in some newer markets.
Well I think you just hit the nail on the head it's a little of both we have a lot of those.
Newer stores that are now in our comp base, we saw about a 60 based head wind assist the 60 basis point headwind in our comp sales related to the new stores rolling into the quarter in the second quarter and that is being that's higher even in the seventh or in the third quarter were seeing that at about 100 basis points. So those are now out of that incremental base and what youre seeing mainly in that group base or the five stores that we opened up in the current year and like we said earlier. These these five stores were targeted in into markets with proven high fees and they've opened up.
Right at our expectations or exceeding our expectations. So we're very pleased with those openings.
Great to hear thanks, guys.
Thanks.
We'll now take a question from Chris Cole with Stifel.
Yes, thanks, good afternoon guys.
Just to follow up on the new store comments I mean, you Steve given the performance is there an opportunity to open more units next year.
Then this year.
Okay.
I tell you, it's Chris I'm right now probably in that range still five to 7.5 to seven again in 2021 thing I've mentioned I've mentioned it for a while I think the key thing for us and the health of our business is I want same store customer count increases and we're not quite there yet and we're working real hard on that and that will be the main focus so you'll probably see us right in that five to seven.
Store range next year.
Okay.
And then John was the upward revision to the earnings guidance based on the better labor cost outlook.
Well it was as you know.
We beat the earnings so we didnt, but that as much as what would be the earnings and the reason for that is really the upward pressure on cost of sales.
And offset a little bit by labor I mean, right now in the third quarter were running about 110 basis points over last year in cost of sales mainly related to produce.
And so we could see that trend continuing through the third quarter and we expect it to come down.
A little bit in the fourth quarter, but that's why we're projecting.
Cost of sales or commodity costs in the three to four range versus the one to two earlier is just I think everybody knows about the avocados onions, and now we're seeing a little pressure and dairy as well and another thing on top of that Chris as you probably saw a little bit more in preopening because at the beginning of next year.
In the first quarter were going to open I'd like three to four restaurants right. After beginning the year, which will have some pre opening at the end of third quarter.
That will be expensed.
Okay. So thats why when yes.
It's just the check growth was greater in the quarter compared to what you had last quarter can you explain what drove that check growth you guys take additional pricing maybe.
Paul We did what we had was we had about 30 or 40 basis points in mix related to that and then when we did our price increase based upon our.
Comparable store base, we've had additional stores that entered that comparable store base.
In tier three and tier four where we took a little more pricing.
And so we're I think we said previously about 3% we've actually.
The effective rate is at about 3.5, and then we've got about 40 basis points of of mix on top of that and the mix is coming from our what we call bulk ordering and mainly in catering and to go.
And thats, not entrees, but creamy jalapeno, the the CAISO and things like that.
Great. Thanks, guys.
Thank you.
We'll take our next question from Andrew Strelzik with BMO capital markets.
Hi, good afternoon.
You're about six months into running that little bit higher pricing menu.
Normally Ron how do you feel like the brand is absorbing that.
And do you feel like is having any impact on traffic if not.
How does that kind of.
Weigh into your thinking on the pricing power of the brand.
Yeah, we're six months into it we're pleased with it.
And as far as customer accounts take away the headwind and take away the whether its at probably a flat now where that's an improvement from the prior year.
So we're excited about it as we move forward as always so as we continue to look at it and look at our menus I look at it market specific I look at all our competitive set to make sure we have the value prop in the market that's going to always drive what percent it will be.
It just so happens a lot over the last two years a lot of guys went up a lot higher than the three 3.5% to 4%. So we had a little bit more in the <unk> and the value play within the markets, but well do that study again as we move forward and that's the number one indicator on how much price, we'll take as what the market will bear and then we'll move from there and deal with the internal cost pressures that we see coming up in 2020.
Okay and can you talk a little bit more about how things are trending in the off premise business in particular around Olo and I'm curious once you started marketing that I believe it was supposed to be in May did you see an inflection.
In how things have been trending there.
Yes, we saw Andrew this is John we saw the adoption rate go up which we've been very pleased with we started promoting that in period five.
And we were seeing 13% to 14% of overall to go and now thats around 17% to 18%. So we saw that definitely the adoption rate go up on that.
When we fully implement our dispatched by the end of the year hopefully, we'll even see that go up further.
Okay and then my last question.
It feels like the news flow around.
Closings within the industry and bankruptcies in the industry for some of the mid sized players have picked up recently.
I guess I'm curious.
You feel like that creates a better operating environment for chuys or does it not impact you guys, one way or the other it's just.
Yes, it feels like maybe brands that there could be some switching with I'm not sure if it's necessarily in your markets, but curious if you think that actually creates a better operating environment for you.
I mean right now either.
I don't think its really change the operating environment had been the same as had been in tough environment for a while and it's continuing to be tough as we move forward I think the people that really balance over the next year the.
The the off premise sales and the inside four walls hasn't really balance that execution standpoint, well be the ones that end up making the move on the customer account. So thats what were focused on.
Great. Thank you very much.
Very welcome.
Well now take a question from Nick say 10 with Wedbush Securities.
Thank you congrats on a great quarter.
In terms of the labor initiatives.
Are there.
Is there more to come or do you feel like you've kind of right size things done.
Maybe there.
Right now it's kind of in the rear view mirror.
More better opportunity there.
I think that long term Nick over the next year and a half two years, we have a lot of initiatives that we're just really getting started what we call smart trap and looking at some different pieces of equipment and technology as we move forward I don't think thats something were ever going to stop working on to be honest with you with the wave technology and that the world's changing as fast as it is now.
A lot of it's been through like John said, when we have some leverage probably not as much as we had in the second quarter for the rest of the year.
But that's something we'll always continue to work on whether it be the power systems are the smart prep or equipment.
Got it in terms of the openings next year and in new markets.
No new markets as I mentioned in my script, I think Wes the we've had the tried and true.
The last piece of our whole strategy of real estate, when I want to get to psych.
Psycho analysis of that.
Well start really testing that and really looking at 2020 stores. So until that is really implemented I, probably will not be going into any new markets to 21 stores 2021.
Got it and then last question.
I know you guys said, we haven't we committed to a pricing.
Strategies.
In 2020, yet.
But is it fair to assume that even if it's not like.
3%, it's probably not going to be down in the mid 1% range.
Again, I am back probably say, yes, but again I'll do it the market bears, but I mean, obviously everybody is dealing with the information. We are so I think you'll see a competitive set out there probably match on getting close to what they did this year.
And so I don't think anybody is going to be around that 1.5% to 2%. So I think the value spread will be a little higher than that mid ones.
Got it thank you very much.
You're welcome.
And once again, if youd like to ask a question. Please press star one well take our next question from Andy Barish with Jefferies.
Hi, This is Alex on for Andy maybe if I could approach that second question a little bit differently.
I believe when you talked about implementing some menu design research.
Maybe better highlighting value one of the things out of the menu.
Anything there.
Great question.
Yes, Okay. That's a great question right now we do have a menu change happening probably at the end of October it's not going to be any items that what's roiling more design and really use and our strategy that we did from our study on really highlighting some certain items grouping them, a little bit differently, where they're out on the page a little differently, we thought that was a plenty.
On the first rate of looking at our entire menu is this really the design and so and we did a focus groups and all that stuff. So that was exciting. So we're excited about that and how we might look at at the beginning of 2000.
20, when we do our price change, which we usually do at the beginning of the second period every year that you might have a couple add ons in a couple of the lease at that particular time, but right now I will only be a design change in October at the end of October .
Got it do you think that helps keep that the mix kind of in that.
Slightly positive the 30 to 40 basis point range. So what you saw in the second quarter.
I do.
The design changes that Steve's talking about would be a whole different mix change because what I was talking about mix is really from the bulk that is off menu.
The items, so thats really aren't that to go and that's not even on the menu and that made the biggest jump as I mentioned I think in the call again, you saw our catering our bulk NIM number was 1.52nd quarter. This year and Thats up against 400000 in quarter. Two 2018, so that was the big mix change.
Got it that makes sense.
And then just thinking about the loyalty program that you mentioned.
Could you give a little color as to how the table management system might play into that and do you feel like Thats, a big unlock into driving in store frequency or more for off premise.
And is that.
Costs included in <unk>.
Hey, guys.
The cost is included in the gene a guide and what we're looking at is more from from a loyalty standpoint, we're looking more at engagement versus reward.
When we're looking at loyalty program, although we're going to we're going to do some more research as we said here in the back half on all different things all different types of of loyalty programs, but with that being said the new table management system is allowing us to attract customers track what how many times they come in track what they eat.
So specifically, let's say, we have a customer that likes.
Our eldest fried chicken and we come out with a new Elvis fried chicken salad.
We get specifically segment the marketing and go after those people that like our LSW fried chicken and recommend coming in to try our new Albert fried chicken salad.
Or if a customer hasn't come in for two months.
We can buy them back in with the pre k., so or something like that so it really allows us to segment, our customers and what they've ordered and what their experience has been and invite them back in or just really have engagement with our customer to make sure that they feel like a VIP to lease and obviously increase our E mail addresses as we move forward with wisely.
Got it thanks.
Thank you, we'll now take a question from Dan Daugherty with Raymond James.
Hi, guys its Dan Daugherty on for Brian Vaccaro.
Quick question believed there have been some new value initiatives during the week not sure if that system wide or in certain regions, but any color on how those are performing.
Yes, that's definitely not system wide and its not choose.
Strategy per se, but in certain stores that we would want to get some.
Little bit more awareness and because we're newer to the markets we did offer.
Tuesday night, which is a taco night.
Thats and we are fairly Wednesday, as we have fajita nights at a little discounted price and we do $5. Margarita is all the time every day and those are the three items and those are the three days and I'm pleased with how they've done we've increased some traffic in those stores, which is our main.
Main thing obviously, the most expensive seed is the one where no one's butts in it so thats what were doing there.
But and it's improved its it proves out and we're going to run that at least for a year and now in those stores.
Okay, Great and then one other quick one which is what was off premise sales mix into Q.
13.4% since it was up actually 13.4% as well.
Okay, great. Thank you.
Thank you.
Well now take a question from Bob Derrington with Telsey Advisory.
Yes, Thank you Steve.
I think we saw earlier today some of the weakest trends.
That I've seen on a black Fox specifically within Texas.
I think the industry comp trends were down about 2.7% with traffic down almost 6.6%.
Obviously your business doesn't sound as though it's seeing.
Such dire trend.
Steve given what you see in the market down in Texas.
What's happening down there versus the success that you continue.
Seemingly to have right now.
Yes. This is obviously I've been our home market and I think as we talked about last conference call. We did see some softening in Houston and that's part of that part of the reason.
Great.
He is in Houston.
But that's also why we did the focus market and at the beginning of the second quarter are there any marketing and.
On top of the paid social paid digital and we felt like that that has a nice little rebound for us in Houston, where theyre doing very very well now, but our Austin Dallas have always continue to be some of our strongest markets in the company.
That's really encouraging.
Can you give us any kind of a read on how.
Specifically within Texas, you've done versus the industry trend.
You kind of color.
Well I mean, obviously the industry trends that you you said.
Compared to like Steve said, our Texas stores are doing better than the average.
Our comp sales so that ought to give you a little indication of where that's trending.
So they are definitely doing better than than are like I said in July running over 2%, Yes, having said that I'm kind of pleased with the overall trends.
Of the whole saw face actually right now takes away the weather that.
A lot of people have been mentioning for.
Quarter, two specifically the fourth period to that.
So we're kind of excited.
Terrific. Thanks, guys.
Thanks, Bob.
And it appears there are no further questions at this time I would like to turn the conference back to Steve Hislop for any additional or closing remarks.
Well. Thank you all so much Jon and I. Appreciate your continued interest in Chuys, then we will always be available to answer any and all questions again, Thank you and have a good evening.
This concludes today's call. Thank you for your participation you may now disconnect.